You spend every working day helping your clients ensure that they have the appropriate coverage for the risks they assume — you need to make sure that you’re assessing your agency’s risks with the same careful attention.
Insurers are in the business of helping their clients cope with unanticipated crises: whether it’s a minor fender-bender or significant damage from flooded property, people buy insurance to make sure that they can bounce back from disaster.
As a natural consequence of assuming so much risk from clients, insurers also need to have some fail-safes to prepare for worst-case scenarios. How can agencies and agents best prepare for the unexpected?
What is E&O Insurance?
The process of designing policies for clients is a complicated one, and it’s very possible for oversights to occur. When this happens, litigation is a real possibility, and a costly one at that. To avoid this unfortunate scenario, insurance providers who underwrite complex, risk-heavy policies can seek out errors & omissions (E&O) insurance as a precaution.
According to Investopedia, E&O insurance is a “professional liability insurance policy that protects companies and their workers against claims made by clients for inadequate work or negligent actions.” Normally, these policies cover both the defense costs of any litigation as well as the cost of any settlements made in arbitration.
How Do You Know If You Need E&O Insurance?
Before you set out to purchase an E&O policy (which can be quite costly), you’ll first need to see if it’s even worth making the investment.
In order to assess your agency’s need for E&O insurance, you should ask yourself a series of questions. Has your agency grown recently? Are you insuring higher-value, higher-exposure clients? Has your agency recently changed ownership? In any of these situations, you may experience higher-than-average risk exposure, which warrants an E&O policy.
In some cases, your agency may simply be required to purchase E&O insurance: for instance, financial advisors are legally obligated to obtain E&O coverage by the Financial Industry Regulatory Authority, and some company investors can also make this coverage a requirement. According to research from Insurance Journal, 16.1% of agencies with E&O coverage cite requirements as the number one reason for acquiring that coverage, whereas some 83.5% cite a need to protect agency assets.
Broadly speaking, the best way to determine if this coverage is necessary is to review your agency’s exposure against its coverage, in very much the same way you would for a client. The lines you operate in, your experience in each field, and your stability as a carrier will all affect your risk and E&O premium rates, so they are important to consider.
Minimizing Risk Through Relationships
Although E&O is an important way to reduce agency risk, the best approach is to avoid the accumulation of risk in the first place. To do this, agencies and agents will need to ensure that the correct documentation exists for each policyholder, that policies are consistent, and that agents fully understand the coverages of each policy (so that coverage hiccups don’t happen further down the line).
In the same Insurance Journal piece, founder of Burand & Associates LLC Chris Burand notes that “putting in the time and effort needed to properly address the needs of every client” is the surest path to eliminating E&O exposure. If your agents take the time to understand every aspect of their clients’ needs and build the strongest possible relationships, there will be far less risk of costly litigation.
Still, insurance agents are human, and are therefore still prone to mistakes. Even if your agents master their policies and build lasting connections with their clients, slip-ups can still happen (as well as clients who are hell-bent on litigation). In either of these cases, E&O insurance would be a lifesaver — so, it’s smart to begin assessing your agency’s coverage and exposure as soon as possible. Just as you would advise your clients to buy insurance before they need it, so too should your agency.